Are Multinationals Becoming Less Global?

Conventional wisdom and substantial evidence based on hard data assign to multinational companies (MNCs) a crucial role in the globalization of economic activities. Despite the fact that the number and economic relevance of MNCs have steadily grown in the last 50 years (UNCTAD estimates show that at the end of the 1960s there were roughly 7,000 multinationals [PDF] operating worldwide, while almost 80,000 active MNCs were counted in 2006 [PDF]), closer analysis indicates that a relatively small number of very large multinationals is still responsible for most of today’s cross-border economic activity in the world. Understanding the extent and nature of their global presence is therefore vital in the assessment of today’s globalization.

The recent global recession has directly and deeply impacted the level and nature of cross-border activities. For instance, as reported by UNCTAD (PDF), global FDI fell by 18% to 1.35 trillion US$ in 2012 with respect to 2011 and still remains below 2005-2007 precrisis figures. As illustrated in a recent article, in the aftermath of the crisis, MNCs are adjusting their global strategies by narrowing their focus relative to international markets. Examples of market exits by large foreign multinationals populate the press, ranging from Suzuki, which announced its decision to exit the U.S. car market, to General Electric, which recently moved the manufacturing of washing machines, fridges, and heaters from China back to the U.S., to a plant in Kentucky. Thus, the current global scenario poses particularly acute questions that merit attention and compelling answers in relation to the current state of cross-border economic integration. How really globalized are the world’s largest MNCs today? Are they truly changing their global footprints? And, most interestingly, if this is the case, what is the direction of such change?

To answer these questions, we considered the world’s largest 500 companies as ranked in the 2012 Fortune Global 500 list and collected information on their over 175,000 equity affiliates, both national and international, scattered all over the world. (In particular, for each affiliate we recorded its location as well as the variation of the parent company’s equity stake in such affiliate in 2012 with respect to 2011.) Below, we report some of our most remarkable findings:

The Fortune Global 500 companies, despite showing a higher-than-average international inclination, continue to locate the bulk of their activities at home and maintain a pronounced regional focus in their operations. The world’s 500 largest MNCs have, on average, 58% of their equity affiliates located within their home countries and 42% placed internationally. Furthermore, most of the operations remain at a regional level, if we consider that the companies examined have, on average, roughly 71% of their equity affiliates situated within their home region and only 29% located globally (i.e. outside of the home region). Thus, distance does matter and regions play a crucial role in shaping cross-border economic activities.

The world’s 500 largest companies are changing their global footprints by narrowing their international presence and further reinforcing the focus on their home markets. Overall, the findings obtained indeed show a decrease of equity investments in international affiliates and an increase of investments in national affiliates in 2012 with respect to 2011. Stated otherwise, on a global scale, MNCs have reduced their international equity exposure and augmented their emphasis on national operations. Quite interestingly, relative to the regional (versus global) orientation of the companies examined, the results document a slight increase of investments in regional affiliates and, simultaneously, a stronger reduction of investments in global affiliates.

The Fortune Global 500 companies present significant differences in their levels and patterns of globalization, in particular when considering the distinct geographic locations where they operate. For instance, North American firms have decreased their investments in both their international and national affiliates, with a significantly stronger focus on the reduction in their international equity operations. Western European companies have also decreased their international investments but slightly increased their national ones, whereas Asian firms have reported an increase in both categories, with a considerably stronger emphasis on boosting their national equity investments.

The study aims to provide an inclusive assessment of the actual extent and direction of globalization grounded on hard data relative to the world’s 500 largest MNCs. Our findings reinforce the notion that it is an ill-fated misconception to picture globalization as an already advanced, inevitably rapid, and geographically homogenous path to perfect cross-border integration.

Pankaj Ghemawat is Global Professor of Management and Strategy and Director of the Center for the Globalization of Education and Management at the New York University Stern School of Business and the Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Spain. He is also the author of World 3.0: Global Prosperity and How to Achieve It.

Niccolò Pisani is Assistant Professor of International Management at the University of Amsterdam.

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